How Do You Handle Overpayments to Employees?

Don’t worry if you’ve overpaid an employee; you’re not alone. Though it’s a commonplace error among payroll professionals, it’s sure enough pretty complicated when you try to resolve it. Here we try to address the issue with various scenarios and their most feasible solutions. But keep in mind that these solutions are in no way the most exhaustive list. In reality, you need to be much more careful and consider many other factors in trying to equalize the discrepancy.

First things first – we need to understand why the employee was overpaid in the first place. Of all the various reasons, a few that we want to consider are as follows: The employee didn’t perform his or her duties for the salary entitlement but was paid by mistake. The second most common reason for overpayment is human negligence, i.e., clerical or administrative error. We will try to crack these scenarios with the most conducive solution that would be agreeable to the employee in question and your company.

Failure of the Employee to Perform Duties (Work Not Done)

Consider the scenario when the employee takes advance vacation pay before earning it. They have served the company for less than a year and are not entitled for vacation pay before its actual accrual, but they were approved for it. Now, after borrowing full vacation pay, they serve their two weeks’ notice. How will you deal with that? What will happen to the unearned vacation pay?

Before asking the employee to return any amount to you, consider that you won’t get the EI or CPP deductions back. These are the ones you deducted from the overpaid vacation pay. In addition, you won’t be able to adjust the employee’s T4 that would reflect the reduction in pay. For the above mentioned reasons, if you want the employee to return the overage, it would serve you better if you get the gross pay, not the net pay.

It’s natural to feel anxiety about the overpaid amount, especially if the employee in question has left the company. Note that, if the employee has left the company on good terms, a humble letter clearly stating the details of the overpayment, reasons why such an error has occurred and the best possible ways for repayment is perhaps the best way to approach the solution on cordial terms. But if things take an ugly turn and you were forced to the legal route, keeping a record that the employee was initially given the chance to pay back will help on the legal front.

Human Negligence – Clerical/Administrative Errors

But what if the error was caused by human negligence and the mistake was committed accidentally? In this situation, you have to correct and re-issue the employee’s T-4 form. While doing so, you have to deduct the amount of overpayment from the total income as listed in the T-4, unless…

• The employee did not repay the overpayment as promised,
• The employee refused to repay,
• The employee chose to keep the overpayment or
• The overpayment resulted from a secretive arrangement between the employer and the employee.

For all the above mentioned reasons, you are still required to list the details of the overpayment with the employment income for the accounting year.

Please note here that if the employee agrees to repay the overpayment within the year of the error, it would be relatively easy for you to account for it, as the employee just must repay the net total and you can internally adjust your remittances before the year ends. But if the employee does not repay in the same year, then you should ask him or her to repay the gross amount. In this case, you cannot have remittances of your total deductions.

Employers’ Legal Rights by Canadian Province

Asking an employee to repay the overpayment is not a walk on the beach – just a word of caution. It’s fairly complicated and has all the ingredients to get dirty. It always serves an employer to know his or her legal rights in matters like these. Canada has clearly defined laws for such situations for each and every province, as follows:

1. British Columbia – The employer must have written permission from the ex-employee clearly stating the exact dollar amount that is to be repaid. Vacations overpaid can also be deemed as a “gift” from the employer to the ex-employee if they agree to the arrangement. But if a repayment is deemed necessary, the employer must have the same written permission from the ex-employee to deduct the vacation payment.

2. Manitoba - Here, you don’t have to have written permission from the ex-employee to deduct the overpayment, but you are expected to take remedial measures as soon as you notice the discrepancy. But, if you miss this timeline, the ramifications would prove expensive for you. It would mean that you and the ex-employee would need to agree to a new wage. A new law also states that the employer can only deduct a maximum of 30 percent of an ex-employee’s net total.

3. New Brunswick – For the year the overpayment error was made, the employer can deduct the employee’s pay. The employer may not have any written consent for regular wages, but he or she should have a written and duly signed policy in place stating the rules of deduction for overpayment for vacation pay.

4. Newfoundland and Labrador – All that is mentioned in the lawbook is that the employer is free to deduct the overpaid wages. No further details are given.

5. Northwest Territories and Nunavut – The law here states that for vacation pay and regular wages a written consent and approval are required from the employee to exercise any overpayment deduction.

6. Nova Scotia – The employer is entitled to deduct the overpayment to the extent that the employee doesn’t fall below the minimum wage band. For any vacation pay overpayments, the employer should have a written and signed policy in place beforehand stating that they reserve the powers and are permitted (by law) to deduct overpayment should the situation occur. If the employer fails to put in place the overpayment policy at the time of hiring an employee and deducts the overpayment, the employer has the legal right to approach the Ministry of Labour and Workforce Development.

7. Ontario – A deduction in regular wages is permitted, but for vacation pay, the employer is supposed to have a written approval from the employee.

8. Prince Edward Island – The employer can make arrangements with the employee to deduct the overpayments within the next few pay periods or as per the agreement with the employee. The amount deducted and the time cycle are not mentioned, as per the law.

9. Quebec – For all the testified cases of overpayments in regular wages, the employer has the right to deduct and recoup the same without any written consent and permission from the employee. For vacation pay overpayment deductions, though, the employee should get a written consent from the employee.

10. Saskatchewan – The employer should have a written policy in place beforehand stating that they may carry out deductions should any overpayments occur. The employer is also expected to deduct and recoup the pay within the next few pay periods post overpayments.

11. Yukon – The employer should have a prior written consent from the employee for any deductions in the regular and vacation pay.

Is receiving the repayment the end of it? What do you need to do next? As per the CRA, the employer should issue a letter to the ex-employee stating the tax year of the overpayment, why the overpayment error occurred and the amount of the repayment. This would help the ex-employee to claim the personal income tax and benefit returns.

As a preventive measure, it is mandatory as an employer to know your standing in case of payroll errors. Make the best practices a habit for your department with Checkmark Canada Cloud Payroll, which will help you avoid errors and maintains checkpoints to detect them as early as possible.